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5 Surprise, Shocks and Questions from SAT order revoking SEBI 2 years ban on PWC


5 Surprise, Shocks and Questions from SAT order revoking SEBI 2 years ban on PWC

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5 surprise, shocks and questions from SAT order revoking SEBI 2 years ban on PWC

 

The Preamble of the Securities and Exchange Board of India describes the basic functions of the Securities and Exchange Board of India as "...to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected there with or incidental there to"

 

The one of the main objective of SEBI is to protect interest of Investors in listed securities, considering that SEBI has issued Show Cause Notice to Auditors of Satyam and order a ban for 2 Years on PWC network which is one of the Big4 audit firm, it try to provide some justice by punishing the network firm and the matter went to High Court for considering jurisdiction

 

1) Bombay High Court giving conditional jurisdiction to SEBI

The Bombay High court has given order in case of PWC vs SEBI that ICAI has jurisdiction to act against Chartered Accountant in case of negligence, SEBI has jurisdiction provided it proves there is fraud, intention or mens rea and because of which millions of investors has lost money in stock market. Whereas, SEC & PCAOB had jurisdiction over auditors of US listed Companies, the same is not the case with SEBI.

The government can amend income tax act retrospectively to collect tax revenues from entities, why it cannot amend SEBI act retrospectively to provide justice to millions of shareholders? Will government act?

 

2) SEBI took 9 years to conclude that Auditors dint follow accounting standards, however was not able to provide evidence of means rea or fraud by auditor 

There is yet another aspect. The show cause notice was issued on February 14, 2009 and August 26, 2009 by SEBI. The impugned order was passed on January 10, 2018. It took SEBI nine long years to complete the proceedings and the fault lay entirely on SEBI. The request of the appellants to cross examine certain individuals whose statements were relied upon by SEBI was rejected.

This Tribunal on June 1, 2011 allowed the appeal and directed SEBI to allow cross examination. SEBI did not do so and took the matter to the Supreme Court and kept it pending for six years. The Supreme Court on January, 2017 held that the stand of SEBI was incorrect and directed that cross examination and inspection should be allowed to the appellants.

SEBI was only able to prove professional lapse on the part of the auditors in conducting the audit especially their failure to seek direct confirmation from the Bank relating to Bank Balances and fixed deposits. These lapses amounted to negligence. Action has already been taken by ICAI against the auditors. A finding of guilt cannot be imposed upon on the basis of preponderance of probabilities. There should be intention or mens rea by Auditors

In the present case there is no shred of evidence of any connivance or collusion nor there is any finding of actual collusion or connivance by the engagement partners and / or by the audit firm with the management of Satyam

Finding of a lapse in the professional work of Chartered Accountant which can become a ground for professional misconduct to be taken up strictly by the ICAI but such lapse under no circumstances could lead to a conclusion that the engagement partner / the audit firm had with intent manipulated the books of accounts in a reckless or careless manner.

 

The question remains why was SEBI not able to provide mens rea by Auditors?

 

3) Investors were misled into believing that the audit was carried out by an international firm called PWC

PWC is not a network firm, there are 10 different partnership firms, which are sharing resources. Satyam Computers and shareholders knew that they were appointing a firm and not a brand or a PW network. The contention that investors were misled into believing that the audit was carried out by an international firm called PW is patently erroneous. The international firm is called PWC and the Indian firm is PW. There is a world of a difference between PWC and PW.

 

In the instant case, there is no evidence on record to show that the network is registered with ICAI under the Network Rules. There is no evidence to show that the network is using the turnover or financial of each firm as a collective resource and the same is being pooled. There is no evidence that the ten firms are using the word “& Affiliates”. In fact the evidence is otherwise. All the ten firms are using the words “& Co” or “Associates”,

 

Why Big4 Firms using International Brand and why ICAI is not taking any action for such usage if there is no relation with local CA partner? Are they in directly marketing without taking any responsibility?

 

4) 90% of Engagement Team has changed and out of 98 partners 78 are new partners in PW firms post Satyam

There were 98 partners in the ten firms out of which 70 are new partners who were not partners of the PW firms during the period 2000 to 2009. Thus banning them from doing audit work of listed Company merely because they are presently partners in PW firm is in complete violation of Section 31(2) of the Partnership Act Further, 90% of the staff engaged in the “engagement team” are different now and debarring them for no fault of theirs was thus also arbitrary and illegal

It was contended that the ten firms were not involved in the audit of Satyam. Each of the ten firms is a separate legal entity registered with ICAI and has its own budget and is assessed separately under the Income Tax Act. The ten firms have a resource sharing agreement with each other, based on which the ten firms share resources, manpower, offices, etc. The sharing of such resources is to facilitate mobilizing of space, manpower at short notice and, does not in any way, make the ten firms as one big unit / firm. It was urged that the ban order was wholly illegal and in violation of Article 14 & 19(1)(g) of the Constitution of India.

 

Partnership Act (continuity of business) has priority over investor’s protection (SEBI)! Should government amend this?

 

5) Will ICAI will act against PWC network firm?

The SAT ruling clearly said there is no evidence on record to show that the network is registered with ICAI under the Network Rules. SAT has ruled that ICAI can only hold PWC under CA Act and not SEBI. Then the question arises why ICAI has not taken action against PWC network firm or was there no network firm then why the partnership firms are using brand PWC? As per SAT ruling the 10 partnership firm involved dint have any network?

 

Now that SAT has ruled, will ICAI proceed against PWC or SAT's observations will remain in paper?

 

Download the order of SAT below link

SAT_Order-20190911033515.PDF

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